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Tuesday, December 9, 2014

Government, Competition and the Myth of the Free Market

Much of economics is scrubbed free of actual history. Instead we are given abstruse and complex mathematical equations, theoretical models, unrealistic assumptions, just-so stories, and fairy tales about rational actors and markets reaching equilibrium.

This scrubbing of economic history from memory has been extraordinarily effective, particularly in the United States, a place without history. Americans are much like the protagonist of Memento, for them, the world they inhabit only just sprang into existence yesterday. Things have always been the way they are and no other. Americans, primarily concerned with remaining in their class, climbing the greasy pole of management and not slipping down into the lower classes, have no time for any consideration which does not make them more money, except for spectator sports. They are idiot savants, capable at doing whatever their job is, but incapable of questioning what they are doing of reflecting on why they are doing it. You will frequently find even upper-class Americans of considerable education and qualifications who cannot point out where the United States is on a map, when the Civil War or World War Two took place (or who the enemy was), or name a single president outside of maybe George Washington (and perhaps not even the current one). Ninety-plus percent of Americans would agree with Henry Ford – “history is bunk!” As George Carlin once pointed out, the elites want a populace who is just smart enough to do their jobs to keep the economy humming along, but not smart enough to question the system they are laboring under.

This wholesale disappearance of the past serves a purpose for the elites. It allows nonsense economics doctrines to flourish. Most particularly, it allows the quasi-religion of libertarianism to flourish, which is accepted by nearly everyone in the United States to some degree or another. People in America accept that the wealth they enjoy is entirely due to the “private sector” and government is nothing more than a burden that has prevented capitalism from delivering it’s promises and must be restrained, curtailed, or perhaps eliminated entirely and replaced by the ministrations of the “free” market.

Such assumptions make this article fascinating: Empire of Cotton: A Global History. It is a review of a book about the history of cotton manufacture. But as the article points out, when you look at the actual history of capitalism, you get a different picture than the one that is promoted by the economics priesthood - "The brutal history of cotton debunks many of the most popular myths about capitalism."

Cotton’s transformation into the world’s most lucrative global commodity began slowly. Beckert marks the initial pivot with the emergence of European empires in the 16th century. Columbus’ initial encounter with the Americas, alongside the burgeoning spice trade in the Far East, set off a centurieslong scramble that resulted in Europe’s vast appropriation of Native American lands and, by the 18th century, the largest forced migration—enslaved Africans—in world history. A merchant class arose to facilitate the trade in slave-grown commodities—a class that was made possible, Beckert is at pains to emphasize, only with the aid of emerging European states. The privately owned joint-stock companies that settled many of the first English colonies, for instance, could only exist with a royal charter. Beckert rebrands the process traditionally called “mercantile-capitalism” as “war capitalism,” his point being that violence was at its center. Without it, there would be no Industrial Revolution, the next and most important part of Beckert’s story.

If there is an ancestral home for the Industrial Revolution, it’s Manchester, England, where the first factories were built. Cotton propelled the factory’s emergence, created after British inventors found a way to spin slave-grown cotton into yarn more swiftly. The man who invented the mechanized cotton mill at the center of these new factories was Samuel Greg, the prototypical genius-inventor of capitalist lore. By tying Greg’s success to slave-grown cotton and the ghastly conditions of factory workers, Beckert recasts him in a garish new light. Women and children comprised the vast majority of these first factory workers, all of them expected to work 14-hour days and huddled into barracks at night. If we celebrate Greg as a genius, Beckert implies, we must also accept that he was utterly dependent on the most coercive labor systems imaginable.

By the early 19th century, Britain, and soon all of Europe, had robust cotton manufacturing industries. But they relied on imported cotton—and no source for those imports was more important than the United States. On the eve of the Civil War, the U.S. supplied Great Britain with 77 percent of its raw cotton, 90 percent of France’s, and 92 percent of Russia’s. At the same time, cotton-manufacturing industries emerged in northern U.S. cities, propelling the U.S.’s own Industrial Revolution. In fact, Beckert writes, the United States was unique among all other industrializing nations in that it both grew and manufactured its own cotton. The trick, of course, was that all these new cotton-manufacturing nations depended on slave-grown cotton. Like other new scholars of capitalism, Beckert drives home the point that slavery was not a hidebound institution that capitalism destroyed, but an integral one that made capitalism possible.

The article then asks why, if slavery was so integral to capitalism (as indeed it had been for all economies since the rise of city-states and empires) did it fade away?

Why, then, did northern U.S. industrialists insist that slavery end? Beckert’s answer isn’t all that persuasive: He says that “forward-looking” capitalists saw that they could get cheaper, more reliable sources of cotton from emerging growers in places like India, Egypt, and Brazil—and that with the profits industrialists accrued from their cotton businesses, they could reinvest in heavy industry (railroads, iron works) and create new avenues of wealth. But that hardly explains why so many British capitalists continued to support the Confederacy, distancing themselves only when it became clear they would lose. Nor does it make sense in light of how difficult it had been, up until the Civil War, to penetrate other global cotton-growing regions.

More troublingly, Beckert evades a core problem that historians of slavery have cut their teeth on for decades: Why did the British government, at precisely the moment cotton was fueling its Industrial Revolution, back the anti-slavery movement? Between 1787 and 1833, the year Britain abolished slavery in its Caribbean colonies, no state became more involved in the anti-slavery crusade than Britain. Scholars are still divided over this question. Beckert doesn’t even ask it.

My guess would be the arrival of "energy slaves." Once you had invented the heat engine, which could convert heat, burned from fossil fuels, into work, you no longer needed real slaves. The cotton industry became increasingly mechanized culminating in the mechanical cotton-picker which put an end to sharecropping and began the Great Migration to northern industrial cities, where industry had been all along. Plus, as slave owners of the time pointed out, slave owners had to take care of their slaves - feed, house and clothe them - while industrial workers could just be paid a wage and then had to fend for themselves in crowded, industrial cities. Plus, many classical economists came out against slavery, and they had influence even then. Here's Adam Smith:

"From the experience of all ages and nations, I believe, that the work done by free men comes cheaper in the end than the work performed by slaves. Whatever work he does, beyond what is sufficient to purchase his own maintenance, can be squeezed out of him by violence only, and not by any interest of his own."

The book them looks at the situation in cotton today:

Today, most of our cotton continues to be grown in India, as well as in Uzbekistan, Senegal, Pakistan, China, and other developing countries. China has become the manufacturing juggernaut, turning all that raw cotton into the T-shirts, shorts, and jeans you may be wearing as you read this. Beckert, perhaps forgivably, spends little time exploring how this happened—there’s only so much you can devote to that past 40 years, when this new trend emerged, in a book that covers half a millennium. Yet he still finds the state, even Communist China, as doing more or less exactly what Europe and the U.S. did in the 19th century. In the name of national wealth, China has colonized vast new regions and exploited millions of laborers—only with more ruthless efficiency.

That Uzbekistan reference is especially interesting. Uzbekistan is the poster child for corrupt, extractive institutions that favor the ruling class at the expense of the wider society in the book "Why Nations Fail" by Acemoglu and Robinson. They also mention it on their blog:

The basis of Uzbekistan’s economy is cotton, which makes up 45% of exports. The cotton bolls start to ripen and are ready to be picked in early September, at about the same time that children return to school. But as soon as the children arrive the schools are emptied of 2.7 million children (2006 figures) who are sent by the government to pick the cotton. Teachers, instead of being instructors, became labor recruiters. In the words of Gulnaz, a mother of two of these children:

At the beginning of each school year, approximately at the beginning of September, the classes in school are suspended, and instead of classes children are sent to the cotton harvest. Nobody asks for the consent of parents. They don’t have weekend holidays [during the harvesting season]. If a child is for any reason left at home, his teacher or class curator comes over and denounces the parents. They assign a plan to each child, from 20 to 60 kg per day depending on the child’s age. If a child fails to fulfill this plan then next morning he is lambasted in front of the whole class.

The harvest lasts for two months. Rural children lucky enough to be assigned to farms close to home can walk or are bused to work. Children farther away or from urban areas have to sleep in the sheds or storehouses with the machinery and animals. There are no toilets or kitchens. Children have to bring their own food for lunch. In the spring, school is closed for compulsory hoeing, weeding, and transplanting (see here).

So school or no school, children aren’t learning all that much in Uzbeki schools. They are instead being coerced to work. This type of coercion is actually all too common, and is indicative of the sorts of institutions that not only fail to impart human capital to children, but are at the root of much more widespread economic and social failure.

It's not just Uzbekistan. Here's the situation in Egypt (note the date of the article - just before the 'Arab Spring')

Cotton has a long and chequered history. It may have existed in Egypt as early as 12,000BC, and thanks to rich soil and an ideal climate, it has been successfully cultivated in the Nile Delta to make fabrics for at least 7,000 years. Arab merchants brought cotton cloth to Europe about 800AD. When Columbus arrived on the American continent in 1492, he found cotton growing in the Bahamas. It reached England two centuries later.

Cotton is actually two crops: fibre and seed. Around two-thirds of the harvested crop is composed of the seed, which is crushed to separate its three products: oil, meal and hulls. Cottonseed oil is a common component of many foods, used primarily as a cooking oil or salad dressing. The oil is used extensively in the preparation of such snacks as crackers and digestive biscuits. Limited quantities also go into soaps, pharmaceuticals, cosmetics, textile finishes and other products. The meal and hulls are used as livestock, poultry and fish feed, and as fertiliser.

Even after 7,000 years, cotton remains our most adaptable and widely used fibre. From all types of clothing to spacesuits, banknotes, linen, tarpaulins and tents, cotton is the single best-selling fibre in the world. Today, in terms of production, China, the US, India, Pakistan and Brazil are the world leaders, but in terms of prestige nothing comes close to Egyptian cotton. It is renowned for producing fibres of uniform length, which are stronger, finer and have greater elasticity than any other fibre. The US and the UK are Egypt's biggest customers, but India, once a major client, stopped importing in the Seventies, when it attained self-sufficiency. India now grows and exports its own 'Egyptian cotton'.

Egypt's cotton exports are worth £150m, a business that should be securing the livelihoods of the farmers. Instead, Egypt is a nation of thousands of Shaban Abdulals, trying to survive amid inflation, corruption, dwindling water resources, high fuel prices and a government that has yet to ease their burden. Now, the farmers feel besieged on all sides. Their decrepit irrigation systems, which pump waters from the increasingly depleted Nile, are rusting. The cost of seeds and fertiliser has soared. Many pay rich landowners ever higher rents for the right to work their modest lands. Those who own their own simple farms end up with smaller and smaller plots as each generation's inheritance subdivides farms among several sons.

Only 15 years ago, Shaban Abdulal Zarhel considered himself one of the developing world's great success stories. From the depths of poverty, on farm-labour earnings of 20p a day, he had grouped together with his neighbours to take on a loan and purchase a hectare of fertile land in the sun-baked heart of the Fayoum oasis. It cost the equivalent of £200. Like countless other farmers across Egypt, Shaban Abdulal and his friends planted the land with hybrid cotton seeds, joining the tail-end of the country's agricultural evolution, growing a high-yield cash crop destined for world markets. The cotton seeds, unofficially supplied by a western agricultural giant, were initially a success, but the amount of cotton they were able to produce kept falling.

Last summer, Shaban Abdulal spent £150 on cotton seeds and fertiliser, and in the autumn he sold his cotton for £200, leaving him £50 for the year. His other brother, who grows figs, gave him enough money to feed the children for the winter. This year promises worse to come. He tells me the biggest victims of the crisis are his children and his neighbours' children, who, instead of going to school, now work the fields, on his own smallholding and that of other landowners.

'How do we find ourselves in this position?' he laments, as we sip weak black tea in the shade of his one-room house. 'When my father was a cotton farmer it didn't cost anything to grow his crops. You'd use the seeds from the previous year's crop, and your cow's manure for fertiliser. If you had a bad crop, you'd eat poorly for the year, but you'd be able to start again the next year. Now we have become dependent on these seeds and the labour of our own families. I can no longer send my children to school; they must work here in the fields with me.'

Walking across the cotton farmers' pathetic patch of land we find half a dozen children crawling on their knees through the undergrowth, like field mice. It is early in the growing season and their vital role is to remove tiny insects and worms that threaten the cotton plants. Standing waist-high in the cotton of an adjacent field, Ahmed Khaled casts nervous glances back towards his foreman. At 10 years old he is a 'veteran' of the fields. His day begins at 6am harvesting onions, a reliable year-round crop; the hardest part of the day comes when he enters the cotton fields, by 8am. 'We work up to eight hours a day,' he says. 'This is the hardest time, keeping the cotton safe when the sun is at its hottest. The harvest is easier – the hours are hard but the weather is cooler.' The youngster shows me his calloused hands, the dirt ingrained in his palm. 'I cannot read or write,' Ahmed says. 'We go to school when we can, but we cannot afford to. School is for rich children.'

Cotton also killed the Aral Sea under the disastrous environmental policies of the former Soviet Union:

The problems began in the 1940s, when the Soviet government built a series of irrigation projects along the Aral's tributaries to support its newly established cotton farms. By the 1960s, so much water was being diverted from the lake that it began to shrink. As cotton production ramped up, more and more water bypassed the Aral Sea, causing its levels to fall dramatically and increasing its salinity. By 2007, the Aral was a tenth of its original size.

The area's once thriving fishing industry has been decimated, and the exposed lake beds contain a high concentration of crop-killing salt, as well as pesticides, industrial chemicals, and fertilizer run-off. These irritants swirl in the air during dust storms, causing tuberculosis, cancer, and lung disease among the tens of thousands of people living nearby.

But back to the main issue, as I've pointed out repeatedly, capitalism has been a government project from day one. Yet they sell us an image of "heroic entrepreneurs" trying to bring us all the goods and services that we love so much having to do constant battle with hordes of nameless bureaucrats who want to do nothing more than tax us all into oblivion and burn the money in a giant bonfire, just because they get off on having power (or because they are closet socialists or something). This view is at the core of the libertarian wold view that has been heavily promoted in the past forty years by billionaires intent on rolling back only those parts of the state that get in the way of unlimited profits (minimum wages, environmental regulations, financial regulations, tariffs, etc.) and is heavily favored in Neoliberal economics.

And as the above shows, capitalism was infused with violence from the very start. From the enclosure movements that forced peasants off the land and into factories, to the Luddite and other revolts being put down in a hail of government gunfire. From the appropriation of native land to African slavery. All gone, all whitewashed and pushed under the table in favor of Neolibraral "open institutions" and "freedom" rhetoric. What a crock!

The use of cotton is interesting, but as these articles show, the railroads were another tale that buries the free-market myths that comprise economics today:

[Richard] White debunks the legend, arguing that the achievement was shoddy and chaotic and benefited the nation very little. The money that built those lines did not come from the railroad men themselves—Leland Stanford, Collis Huntington, Henry Villard, James J. Hill, and Thomas Scott. Instead, they persuaded Congress to lay out enormous subsidies. The Union Pacific alone raked in $43 million in interest subsidies on federal loans, and railroads east and west of the Mississippi River received more than 131 million acres in free land. White explains that largesse as a result of political corruption. But then why did so many investors, including shrewd Germans and Brits, throw money into these enterprises as well? Not until the 20th century would there be enough white settlement and shipping traffic in the West to justify such investments. No rational need existed for decades, yet a railroad-building frenzy went on and on. The builders made a lot of money for themselves, but why did so many people give them so much capital?

Other government subsidies came in the form of stifling, with armed force, any resistance from Indians or any move on the part of immigrant laborers to try to make the railroads serve their needs. White describes in brilliant detail the infamous Pullman strike of 1893, when the government blatantly took the side of the corporations. "By and large, the western railroads remained what they had been before the strike—bloated, ill managed, heavily indebted, and corrupt. … Many were now wards of the federal courts, and all of them depended on the might of the federal government to control their own workers."

The dean of business historians Alfred Chandler Jr., in The Visible Hand(1977), described the 19th-century railroad corporation as the harbinger of order, rationality, and efficient organization. White scoffs at such an image. These corporations were made up of "divided, quarrelsome, petulant, arrogant, and often astonishingly inept men." And instead of the conventional leftist picture of a ruthless, soulless, but all-powerful business that crushed its opponents, the infamous Octopus of novelist Frank Norris, he finds "a group of fat men in an Octopus suit." They were morally challenged men, dripping with hypocrisy, mean-spirited, and grasping.

But White, who is a master of invective, describes them also as stupid and incompetent. Their only claim to genius was their ability "to find occasions for profit in their own ineptitude." Leland Stanford, for example, was well-known to his companions as dim-witted, careless, selfish, lazy, and yet filled with "immense self-regard." That tone of criticism appears all through the era. The Massachusetts railroad executive Charles Francis Adams, dismissed his fellow businessmen as creatures of "low instincts, … essentially unattractive and uninteresting." This is essentially White's view also, and he finds their success more than reprehensible; that such reptilian types ever gained so much power and wealth is bewildering. That their descendants still command so much authority is beyond understanding.

“Transcontinental railroads,” [Richard White] asserts in “Railroaded,” “were a Gilded Age extravagance that rent holes in the political, social and environmental fabric of the nation, creating railroads as mismanaged and corrupt as they were long.” This is a bold indictment, but White supports it convincingly with lavish detail and prose that swivels easily from denunciation to irony.

To gain an edge on their corporate rivals, railroad owners built expensive lines into drought-prone areas that had few settlers and little prospect of attracting more. To finance their risky endeavors, they routinely bribed politicians and borrowed money they could not pay back — while publishing mendacious financial reports. To insure friendly coverage, railroad executives bankrolled local newspapers and arranged to kill or delay the publication of stories that might damage their interests. At the helm of a dangerous industry where workplace accidents were common, they resisted installing air brakes and other devices that would have sharply reduced the toll of maimings and deaths. “The Northern Pacific,” White says, “banned unnecessary whistle blowing on the Sabbath and profane language any day, but it slaughtered workers day in and day out.”

Collis P. Huntington of the Central Pacific and Southern Pacific lines had the soul of a miser. In 1890, a train pulling his private car hit a young hotel worker as she walked along the tracks in rural Missouri. Huntington initially offered to pay for her medical care. But she died after a botched amputation. And when the doctors and undertaker submitted their bills, he abruptly changed his mind. The millionaire grumbled that he “could not possibly protect [him]self from swindle so long as [he] manifested a willingness to show substantial sympathy.” In total, the expenses came to $622. “Huntington would not have looked twice if these had been costs of lobbying,” White observes.

In contrast, Charles Francis Adams Jr., the head of the Union Pacific, regarded himself as a genteel intellectual. The grandson and great-grandson of presidents was merely dabbling, temporarily, in the biggest industry in the land, which he vowed to reform. Adams scorned the venality of his fellow railroad bosses. “Our method of doing business is founded upon lying, cheating and stealing — all bad things,” he remarked. But such high-mindedness did not prevent Adams from playing the game as ruthlessly as his competitors, albeit not as effectively. When the Union Pacific neared bankruptcy in 1890, Adams had to resign his post. On his way out, he ridiculed the looks and clothes of Jay Gould, his more cunning successor.

White seems to take particular pleasure in belittling the image of the man who founded the well-endowed university that currently employs him. Californians liked Leland Stanford well enough to elect him governor. Later, the State Legislature graced him with a seat in the United States Senate. But Stanford’s partners in the railroad business considered him to be a lazy and incompetent fool. “He could do it,” Mark Hopkins wrote about some corporate task, “but not without more mental effort than is agreeable to him.” Stanford, Collis Huntington added, “has never made any money, but has had a good deal made for him and knows no more of its value when he gets it than he does of the way in which it was obtained.”

White’s scathing narrative is often reminiscent of older histories and novels about the Gilded Age that pit clever, if immoral, “robber barons” against a public that grew increasingly alarmed about the extent of their power and ill-gotten wealth. “The Octopus,” Frank Norris’s 1901 novel about the Southern Pacific, is a classic example.
But White calls Huntington and his ilk “men in octopus suits.” He views them as 19th-century equivalents of the profit-mad, short-sighted financiers who recently undermined economies on both sides of the Atlantic. Both transcontinental railroad managers then and the Wall Street bankers in our time ran “highly leveraged operations” that “depended on continued borrowing to meet their obligations.”Both groups made it rich because they had powerful enablers in Washington. In the 1870s and 1890s, when panicked investors dumped the heavily watered stock in their railroad portfolios, the market collapsed, and long depressions ensued. We seem to have escaped the same fate — with an assist from “socialist” government bailouts and stimuli.

Federal largess was hardly absent during the Gilded Age. True, the government was not in the habit of rescuing mismanaged corporations nor, for that matter, of offering aid to ordinary Americans who lost jobs and homes when the economy collapsed. Grover Cleveland, the Democrat who sat in the White House during the depression of the 1890s, intoned, “Though the people support the government, the government should not support the people.” Yet, in 1894, Cleveland’s attorney general, Richard Olney, rushed to court to bust a national strike by railroad workers who were expressing solidarity with a walkout by employees of the Pullman sleeping car company. With a federal injunction in hand, Cleveland ordered thousands of American troops to break the strike and arrest its leaders. At the time, the attorney general was on the payroll of at least one major railroad company.

Yes, this is the "Golden Age" of the 1800's that libertarians want us to return to. The effect of railroads on the economy is also covered in Michael Perelman's book Railroading Economics:

Railroading Economics by Michael Perelman is an indictment of economists. But the indictment is not, thankfully, the familiar rehearsal of untenable assumptions or a mathematical proof of error, useful as they may be. Perelman shows, rather, that economists learned from the railroads that "[m]arket-based, marginal cost pricing will create chaos, as the corporatist economists learned a century ago."

The book begins with a description of how economists realized the destructive nature of market forces in the era when railroads were the largest industry in the USA. That description alone is worth the price of the book because, of course, the lesson fully applies to pharmaceuticals, software, and many other industries today.

Many of the leading economists at the time came to grips with the destructive nature of market forces. Competition, which according to conventional economics is supposed to guide business to make decisions that will benefit everybody, was driving business into bankruptcy and common people into poverty.

Perelman follows that sentence with his indictment of today's classroom teaching:
This lesson was never allowed to take hold among economists. In fact, the same economists continue to teach their students that markets work in perfect harmony, while they advised policy makers to take quick action to put the brakes on competition.

The two-faced behavior continues today, with prominent economists defending monopoly as key to profitability for pharmaceutical and software companies -- and for the same reasons that the railroad economists recognized -- while teaching students and the rest of us that relying on the market produces the best world for all.

In the late 19th century, intense competition, rapid technological innovation and falling prices led to economic downturns, bankruptcies, falling profits and wages, and widespread human suffering. This pattern characterized the railroad industry, for example, where wild expansion, fueled by cutthroat competition, led to chaos, overbuilding and bankruptcies.

In manufacturing, competition frequently resulted in prices falling below production costs. It also resulted in “overproduction,” a glut of unsold goods. As a result, some economists argued for protectionism, limits on competition and the formation of cartels and monopolies to impose order on the market. They identified competition “as a source of inefficiency.”

Early U.S. capitalists such as J.P. Morgan and Henry Ford also distrusted free-wheeling competition, believing it led to chaos. They set up monopolies and cartels to limit competition. Perelman says that a similar process occurred in countries like Japan and Germany.

But forming monopolies didn’t put an end to the business cycle, as the Great Depression of 1929 made plain. Perelman argues it was only the surge in economic demand and the increased role of government economic planning associated with World War II that pulled the capitalist economy out of its crisis in the 1930s.

In order to avoid sliding back into another depression in the post-war years, many business leaders lobbied for continued government economic planning and intervention in the economy. They ultimately won the day. Unbridled competition became a thing of the past.

Contrary to what mainstream laissez-faire economic theory says, what prevails in the U.S. is a form of regulated capitalism. “What prevents the economy from running off the rails every few decades is a combination of government regulation and anti-competitive behavior on the part of business,” says Perelman.

As a result of this contradiction, he wryly notes, mainstream economic theory is littered with abstract mathematical theories and technical jargon that do not reflect the real world. Moreover, he says, “[s]ucceeding as an economist requires one to write in such a way that even most economists are incapable of understanding.”

Conventional laissez-faire economics is divorced from reality, “a pseudo-science that stands in the way of human betterment.”

Railroading Economics examines the mythology of the market (People's World) Note that there are no reviews of the book in any "mainstream" economics publications (Wall Street Journal, Financial Times, The Economist, Forbes, etc., not even the New York Times). That should tell you something.

The fact that competition is a myth and just ends up in misery and chaos has even been admitted by arch-libertarian Silicon Valley investment oligarch Peter Thiel:

Americans mythologize competition and credit it with saving us from socialist bread lines. Actually, capitalism and competition are opposites. Capitalism is premised on the accumulation of capital, but under perfect competition, all profits get competed away. The lesson for entrepreneurs is clear: If you want to create and capture lasting value, don't build an undifferentiated commodity business.

How much of the world is actually monopolistic? How much is truly competitive? It is hard to say because our common conversation about these matters is so confused. To the outside observer, all businesses can seem reasonably alike, so it is easy to perceive only small differences between them. But the reality is much more binary than that. There is an enormous difference between perfect competition and monopoly, and most businesses are much closer to one extreme than we commonly realize.

Monopolists lie to protect themselves. They know that bragging about their great monopoly invites being audited, scrutinized and attacked. Since they very much want their monopoly profits to continue unmolested, they tend to do whatever they can to conceal their monopoly—usually by exaggerating the power of their (nonexistent) competition.
[...]
A monopoly like Google is different. Since it doesn't have to worry about competing with anyone, it has wider latitude to care about its workers, its products and its impact on the wider world. Google's motto—"Don't be evil"—is in part a branding ploy, but it is also characteristic of a kind of business that is successful enough to take ethics seriously without jeopardizing its own existence. In business, money is either an important thing or it is everything. Monopolists can afford to think about things other than making money; non-monopolists can't. In perfect competition, a business is so focused on today's margins that it can't possibly plan for a long-term future. Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits.

So a monopoly is good for everyone on the inside, but what about everyone on the outside? Do outsize profits come at the expense of the rest of society? Actually, yes: Profits come out of customers' wallets, and monopolies deserve their bad reputation—but only in a world where nothing changes...

Competition is for Losers (Wall Street Journal) Thiel then argues that the "creative destruction" of capitalism prevents monopolies from producing bad results: "In the real world outside economic theory, every business is successful exactly to the extent that it does something others cannot. Monopoly is therefore not a pathology or an exception. Monopoly is the condition of every successful business."

Although Thiel's dismissal of competition is correct, his solution is ridiculous. Notice that all his references are from Silicon Valley! This assumes that the entire economy is subsumed by Silicon Valley, which is decidedly not the case! the fact is, the computer/internet industry, particularly software, is a relatively novel and immature industry, which is why there is more churn and entrepreneurship there. But the early automobile industry was just the same. Once upon a time hundreds of small car and motorcycle companies competed against one another. Then they were consolidated to just a handful - Ford, General Motors, Chrysler (now Daimler-Chrysler) and Harley-Davidson. They did there best to squeeze out all competition, even competition with a better product, as the case of Preston Tucker aptly demonstrates. And these monopolies are almost permanently being bailed out by we, the taxpayers, all while they are promoting themselves as "free enterprise" and placing the blame for their repeated failures on "greedy unions" (despite the presence of unions in their competitors' counties of origin).

Even in Silicon Valley we see emerging monopolies - Microsoft has a lock on the computer industry, making Bill Gates the richest person in America for decades running (probably why he makes such a big deal of charity - it's hard to justify this situation). Google, Apple, Facebook, Amazon - all of these are headed toward monopolies. Almost all computer chips are made by Intel (with AMD and Motorola minor players). And even though some of these companies coddle their employees like Google and Apple, Amazon's treatment of its warehouse employees is notorious, even as the president touts them as "good middle-class jobs": Being homeless is better than working at Amazon (The Guardian)

And, of course, Silicon Valley is hardly the entire economy. Are monopolies and mergermania benefiting the rest of the economy that we live under? Is "creative destruction" the norm in industries that have been around for more than a few decades, such as food processing, retail and automobiles, like Thiel contends?

[Christopher] Leonard thinks the contracts that dominate the chicken business, and to a lesser extent the hog and cattle industries, are nothing but parodies of free-market deals. “During their entire lifespan the animals will never brush up against an open, competitive market,” he writes. Although you might think a contract is still a free-market tool, Leonard argues convincingly that this is not the case. Tyson, for instance, pays farmers via a “tournament,” in which they compete against one another to get paid based on their relative performance, measured by things like pounds of chicken delivered per week. The tournament is a zero-sum game in which those at the top earn at the expense of those at the bottom, who earn so little that they will be driven into bankruptcy if their rankings don’t improve. This “helps push the financial risks of farming from Tyson to its farmers,” Leonard writes. Why not sell to someone other than Tyson? Well, there isn’t anyone.

The contracts are dangerous for farmers not just because one of them has to lose for another to win, but also because so little is under their control. Success in chicken farming, Leonard asserts, depends on the health of the chicks, the food they are fed and the technology of the farms. Tyson delivers the chicks and the feed. Leonard reports rumors that farmers who complain are given sick chicks or poisoned food, so they will go bankrupt. As for the farms, newer ones can produce more chicken at a lower cost than older ones; Leonard tells of families who have sunk their savings into farms only to find themselves outgunned in the tournament by a newcomer, just when they thought they were getting clear of their debt.

Why would a bank lend money to finance a chicken farmer who stands a decent chance of going bankrupt? In one of the more shocking facts in the book, Leonard says that the loans are guaranteed by an “obscure federal organization” called the Farm Service Agency, meaning banks never lose money, even if farmers default.

The auto industry is instructive, Lynn saying it "resembles the Hydra, the many-headed monster from Greek mythology." Like their heads relying on one body, the automakers "increasingly rely on a single common body of companies that supply the same components to all of them."

In today's hard times, they stand or fall together, governments facilitating consolidation and bailing out the majors, or in other words, socializing risks, privatizing profits, and doing it for other endangered sectors, Wall Street getting the most by far from a privatized central bank they own and US Treasury they control.
Lynn structures his book in three parts:

-- examples of monopolies and the fallout from unrestrained corporate dominance;
-- the effects on ordinary people; and
-- how it affects other systems - ones in place "to protect peaceful international relations, our knowledge of how to make the products and grow the foods we need, and our political institutions."

Combined, he reveals a neofeudalist system of vast size and power, dominating all major American and global industries, consolidating for greater strength, partnered with governments, operating ruthlessly, crushing competition, exploiting workers, and colluding for greater control, the public welfare be damned...

Monopoly is just "a form of government that one group of human beings imposes on another group, (its purpose being to let) the first group....transfer wealth and power to (itself. They) organize and disorganize, to grab and smash, to rule and ruin, in ways that serve their interests only. At bottom, monopoly is merely a political tool," not because of a better product or service, but through better capitalization and political connections.
The rich "reappropriated the institution of the corporation after (early 20th century antitrust laws restrained them), regarding (them) as the 'owners' of these institutions lies at the heart of our present crisis."

Our system's single biggest problem is having ceded "almost complete power over these institutions (to) a class of people whose interests (aren't) served....by building things but by breaking" them. Capitalism lets some people "use the power in concentrated capital to harness free citizens" and crush democratic freedoms.

As a result, monopolies run America. Antitrust enforcement is null and void, and according to Lynn: "It will take more than a lawsuit or two to overthrow America's corporatist oligarchy and restore a model of capitalism that protects our rights as property holders and citizens."

So ideas of government in opposition to markets and companies in competition with one another are nothing but pure hogwash and propaganda designed to sucker the rubes in Middle America who believe in free market bullshit to accept falling living standards, the gutting of the middle class, and the destruction of democratic governance. History shows that these libertarian ideas are absolute fantasies.

2 comments:

Partly true - after all, the successful Nordic countries have also embraced free markets and competition in a broad sense. The major difference is that these countries are small: small enough that voters can know all the major political players and influencers and keep government broadly honest (and government does the same thing to the few major resident corporations), small enough for the major socio-economic issues to be broadly comprehensible, small enough that political consensus can be reached easily and quickly, but also turn on a dime when conditions necessitate a re-think. It's no coincidence that the world's giant lumbering states - the USA, China, Brazil, India to start - tend to be brutal, corrupt, feature enormous inequality, and socio-economic affairs are dominated mostly or wholly by a vanishingly small elite.

That's an observation I've wanted to make too -all the big countries (in terms of population, economy and geography) - the U.S. China, and I would definitely add Russia, with India and Brazil (and maybe Mexico) to a lesser extent - are converging on a new system of governance that we currently don't have the language to describe. This consists of:

1.) Oligarchic rule - Putin and Putinism in Russia, Russian oligarchs, the financial/corporate/political elite in the U.S., Wall Street and K Street, the Communist mandarins and their family members in China. In most cases, the governing and financial elites have merged. The will of the common people is ignored when it does not align with the needs and wishes of the oligarchy.

2.) Tight control over information/media - outright censorship in China, intimidation and assassination of journalists in Russia, and corporate ownership of the media in the U.s (just five companies control over 80 percent of US media).

3.) A police state, internal armies, mass surveillance of the citizenry, and the suppression of protest in all three countries. A corrupt judiciary sympathetic to corporate interests above the needs of the people.

4.) Staggering levels inequality and very low social mobility. Those five countries are vastly more unequal than anywhere in Europe or Japan/Korea.

If you do a Google search on 'authoritarian capitalism,' you get mainly articles on China. Yet I would argue (and have) that authoritarian capitalism is the condition in all of these countries. As Slavoj Zizek has opined, the Chinese version of capitalism seems to be currently the most "successful" and is probably becoming the default capitalism for the entire world (oligarchy+police state+repression+inequality). If we assume that authoritarian capitalism is uniquely Chinese, we deceive ourselves (in the US especially, we are brainwashed to believe in 'freedom').

The fact that all three countries, despite vast differences in history and culture (The US and China/Russia had diametrically opposed economic systems only thirty years ago and were in a state of virtual war),are all converging on essentially the same system of politics/governence is interesting, and should be more widely noted and commented on.

Could the solution be for these to break up into smaller states? I wonder how that would occur. Also regarding the homogeneity/heterogeneity question - how have Canada and Australia so far avoided America's fate? Lack of slavery perhaps? So it's more than just ethnicity - it's history, too.

Regarding competition as a myth - I should clarify that it has more to do with sectors of the economy. I can tell you that in the construction industry, there is considerable competition among architects, contractors, etc. this is also why our profit margins are practically nonexistent. The above points are applicable to fields that we "pretend" are competitive, such as large-scale manufacturing (automobiles, computer chips, pharmaceuticals, software, and so forth), where there are huge capital outlays and considerable barriers to entry. The railroads were one of the earliest industries in this category, which is why they are so instructive.

But the real point is to arrive at an understanding of the economy more sophisticated than the bumper-sticker bromides of "socialism bad, free market-good" that guides our political rhetoric and decisions today. This cartoon version of the economy is what is being sold by politicians like Paul Ryan, Ron Paul and others, as well as the media, and is extremely influential and destructive, which is why I call out libertarians in particular.